22 Percent of S&P 500 Companies Missed 4th Quarter 2006 Earnings

We have been complaining for weeks that the markets have been becalmed in a Sargasso Sea of complacency. Well, yesterday, something stirred.

The lookout seems to have spotted an ominous movement near the horizon. From yesterday’s Financial Times comes this warning of stormy weather approaching:

“More than 22 percent of the 400-plus S&P 500 companies to have reported results for the fourth quarter of 2006 failed to meet Wall Street expectations. This is the highest level of ‘misses’ since the third quarter of 2004, according to Reuters Estimates.

“The spike in earnings disappointments increases the chances that corporate America will end a three-and-a-half year run of quarterly double-digit profit growth in the last quarter of 2006 rather than at the beginning of 2007, as widely expected.”

And from the Bureau of Economic Analysis comes a revision: GDP in the fourth quarter of 2006 was nowhere near 3.5% but much lower…closer to 2.5%. What a surprise! Spending and borrowing don’t make you grow wealthier!

Investors and speculators might still be complacent, but others aren’t. Insiders are bailing. Vickers Weekly Insider Report analyzes the insider reports that companies have to file with the SEC. Over the years, it’s computed that the long time ratio of insider selling to insider buying stays around 2.5:1. It’s bullish if the ratio falls below this level and bearish if it doesn’t. Over the last six months, the sell-to-buy ratio for insider transactions has been around 13 to 1, notes Vickers. That’s far higher than the long-term mean of 2.5 to 1, and it means that insiders are jittery.

But now, along comes an expert that says it ain’t necessarily so. University of Michigan finance professor, Nejat Seyhun, says insider selling isn’t always what it looks like. A number of factors make the raw data on selling unreliable as a guide to insider confidence. For one thing, a lot of the sales are of stock options, where only the sale on the open market gets recorded, making it look like there’s more selling going on than buying. For another thing, the numbers don’t tell us where the stock price might be heading. So the Professor has come up with his own Insider Confidence Index since 1975. According to it, confidence is just where it should be – neither hot nor cold. Just the way Goldilocks likes it.

Here at the Daily Reckoning, headquarters, we literary economists like fairy tales too.

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

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